(By Rich Bieglmeier) Wall Street has pushed all their chips in, betting that the Federal Reserve is playing with pocket aces and one on the board with a pair of kings. Traders pressed stocks higher in anticipation of the Fed laying down the bullets as expected. If Ben Bernanke flops anything else on Wednesday afternoon, investors that joined the table recently will be made to look like jokers.
The recent wave of buying has moved the S&P and Dow above their 50-day moving averages for the first time since late April, which is a bullish sign, especially while occurring on rising volume.
While the NASDAQ does make it three for three above the key benchmark, but it is only ahead by a few points. So, iStock considers the index to be within the margin of error.
As for what the Federal Reserve will do when the policy is announced at 2:15 pm Eastern? iStock is still stuck on Ben's words a little more than a week ago, the economy produced modest growth in April and May.
Heck, we are only in the 3rd week of June. Unless the economy pulled a thrust reversal like a landing airliner, it's hard to imagine the chairman switching positions so quickly. Typically, Ben hints and then acts. Outside of Goldman Sachs, most brokers believe it would take a market correction in the 20-30% neighborhood to get massive easing.
We believe the fed might jawbone or extend the current twist. The one possible exception is a massive mortgage purchase program to try and get housing prices headed higher. That way, all the folks calling the bottom for home prices, over and over again, can be right, finally.
The major problem with a huge liquidity injection is that gas and food prices, while lower in the last three months, are still relatively high. This at a time when the average person has seen their income and wealth dip, dramatically. It's a horrible combination, less money, but it costs more to buy stuff you need every day – which erodes saving even faster.
Unless Ben Bernanke and the regional Fed Presidents are completely bubble wrapped (Charles Evans seems to be), or heartless (which is possible), I say it would be damn near criminal to throw another life line to Wall Street that's wading in shallow water, while simultaneously pushing average folks deeper out to sea.
There are 88 million fellow citizens that have been magically erased from the work participation rate, and the real unemployment rate, not the re-election rate, is closer to 11%. Toss in underemployed and part-time workers and the number is closer to 15% (if not higher.)
Meanwhile, the folks who do have a job have seen their wages slip. How in the world can the Federal Reserve promote a policy of higher inflation in the current job, income and wealth environment? I just don't see how folks who are the "best and brightest" among us can overlook the impact rising fuel and food prices will have on growth. It would absolutely kill the wealth effect for at least half of the population, if not three-quarters.
If the Fed lays down the Aces Wednesday afternoon, iStock believes stocks will rally in the short-term, gold, silver and commodities prices will rise too, probably with more staying power than stocks; however, a quick return to $4 gas or higher, and more money spent at the grocery store could undo any benefit from rising stock prices.
If Ben disappoints and puts jokers on the felt, then most, maybe all the gains from the post 69k jobs disappointment low are likely to get wiped out. Wednesday will be a day of consequence.